Globalization and Finance Project supported by the Ford Foundation www.bsg.ox.ac.uk FINANCING GLOBALIZATION: LESSONS FROM ECONOMIC HISTORY All Souls College 19 June 2012 CONTENTS List of participants Cyrus Ardalan:Vice Chairman:Barclays Foreward Hugo Banziger:former Chief Risk Officer:Deutsche Bank » Ngaire Woods 2 Jaimini Bhagwati:Indian High Commissioner to the United Kingdom Amar Bhide:Thomas Schmidheiny Professor, Summary of Proceedings The Fletcher School of Diplomacy: Tufts University » Kevin O’Rourke and Philipp Hildebrand 3 Patricia Clavin:Professor of International History & Fellow: Jesus College, Oxford Rui Esteves:University Lecturer in Economics, Brasenose Historical Lessons College:Oxford » Hugo Banziger 5 Marc Flandreau:Professor of International History: The Graduate Institute, Geneva » Rui Esteves 9 Macer Gifford:Visiting Research Fellow, Globalization & Finance » Marc Flandreau 12 Project:Blavatnik School of Government, Oxford » Harold James 15 Charles Goodhart:Professor:London School of Economics » Catherine R Schenk 17 Philipp Hildebrand:Senior Visiting Fellow, Globalization & Finance Project:Blavatnik School of Government, Oxford Contemporary Challenges Roberto Jaguaribe:Ambassador of Brazil to the United Kingdom » Cyrus Ardalan 20 Harold James:Claude and Lore Kelly Professor in European Studies:Princeton University » Charles Goodhart 22 Rob Johnson:Executive Director: » Rob Johnson 23 Institute for New Economic Thinking » Pierre Keller 25 Vijay Joshi:Emeritus Fellow:Merton College, Oxford Pierre Keller:former Senior Partner:Lombard Odier & Cie, Geneva Policy Recommendations George Kounelakis:Managing Director: Morgan Stanley Principal Investments Group, Europe » Amar Bhidé 27 Peter Kurer:former chairman:UBS, Zurich » Peter Kurer 30 Walter Mattli:Professor of International Political Economy & » Roberto Jaguaribe and Fellow:St John’s College, Oxford Augusto Cesar Batista de Castro 33 Kevin O’Rourke:Chichele Professor of Economic History and Fellow:All Souls, Oxford » Vijay Joshi 36 Catherine Schenk:Professor of International Economic History:University of Glasgow George Soros:chairman:Soros Fund Management and chairman Open Society Institute Sir John Vickers:Warden of All Souls College and Professor of Economics:Oxford Ngaire Woods:Dean:Blavatnik School of Government, Oxford Globalization and Finance Project, University of Oxford 19 JUNE 2012 / 1 FOREWORD Professor Ngaire Woods Dean of the Blavatnik School of Government As regulators across the world consider how to Two particular policy ideas are provoked for further constrain and regulate global banking, an equally investigation by the Ford Foundation Globalization and important question is being neglected. What forms Finance project: of global finance best serve global growth and 1. Focus on the link between global finance and development? This question is being probed by the real resources, and investment for development. Ford Foundation Globalization and Finance Program at Trade finance and mechanisms which allocate Oxford University’s Blavatnik School of Government. investment to areas where it can be most Economic history provides several insights. productive are vital elements of a global financial Specifically, by analyzing previous periods of system which supports growth and development. successful globalization, we can attempt to identify Yet these elements of global finance risk being what kinds of finance made them work. This neglected in the contemporary international debate report includes an overview of important themes (by about regulation. Professor Kevin O’Rourke and Dr Philipp Hildebrand) 2. Reinstate unlimited liability in banking? When and a set of memos prepared for the workshop by owners of banks have unlimited liability, or “skin participants. in the game” they have a sharper and more An overall finding of the meeting is eloquently immediate interest in prudence, scrutiny and summarized by participant Macer Gifford: “The earlier the sound management of the operations of periods do not necessarily support the argument their enterprise. Historically, when the liability of for global banks. Rather, that global rules written owners of banks was limited, this was in return for with a clarity of purpose (such as Bretton Woods) accepting accountability and transparency about and requiring bankers having ‘skin in the game’ (such their operations. But that deal is looking tattered. as Rothschilds and JP Morgan in the early twentieth Syndication, securitization, financial engineering, century) can foster prolonged periods of global implicit government guarantees, evermore growth.” detailed and incremental regulation, and rapidly evolving accountancy practices have all rendered accountability and transparency extraordinarily difficult. Perhaps instead of continuing down Sincere thanks this path, regulators across the world should be to those who made this workshop possible, and in particular: the support of Leonardo Burlamaqui at the Ford Foundation; reinstating unlimited liability among the owners of the intellectual leadership of Philipp Hildebrand and Harold James; banks. the terrific research and organization of Rahul Prabhakar, Taylor St John, and Emily Jones; and the design expertise of Toby Whiting. Globalization and Finance Project, University of Oxford 19 JUNE 2012 / 2 SUMMARY OF PROCEEDINGS Professor Kevin O’Rourke and Dr Philipp Hildebrand On 19 June 2012, the Globalization and Finance Project at the Blavatnik School of Government held a workshop on Financing Globalization: Lessons from History. The workshop brought together a unique combination of eminent economic historians, bankers and finance practioners to discuss what lessons might be drawn from the history of finance to inform today’s challenge of reforming the post-crisis global financial system. There are two periods since 1870, but prior to the 1990-2007 period, which are typically regarded as success stories: the nineteenth century, and the period from 1950 to 1972. The nineteenth century was a period of impressive Professor Kevin O’Rourke Dr Philipp Hildebrand globalization, which was genuinely worldwide in scope thanks to the combined effects of steamships, The period from 1950 to 1972 saw the gradual railroads, telegraphs, and empires. reconstruction of the international economy, although this was only partial in two respects. First, while the » According to Angus Maddison (1995, p. 38), OECD economies moved to reintegrate their markets, merchandise exports accounted for just 1 per cent Communist economies were moving in the opposite of world GDP in 1820, but 8 per cent in 1913 – a direction; and much of the developing world adopted substantially higher share than in 1950. In Latin inward-looking industrialization policies, following the America and India the 1913 levels of openness end of European imperialism. Second, the Bretton had not been recouped as late as 1992 (in the Woods settlement prioritized domestic monetary policy case of India they had not been recouped as late autonomy and fixed (but adjustable) exchange rates, as 1998) (Findlay and O’Rourke 2007, p. 510). meaning that capital controls were ubiquitous. » International labour migration was much more extensive in relative terms than today. Roughly Despite these limitations, world trade grew extremely 60 million Europeans migrated to the New World rapidly during this period, as the figure makes plain: between 1820 and 1914, and there were also more rapidly than at any other time since 1870. sizable outflows from China and India. This was in part because of the extremely rapid economic growth of the period, but trade grew more » Net international capital flows, as measured by rapidly than GDP, implying an impressive period of current account imbalances, were extremely large “reglobalization”. even by today’s standards. British capital exports averaged 4.5 per cent of GDP between 1870 and World exports, 1855-2010 1914, and reached 8 to 10 per cent during lending booms. A third of British wealth was held overseas in 1913. Countries like Argentina and Australia were extremely reliant on capital inflows: in 1913, foreigners owned almost half the Argentine capital stock, and a fifth of the Australian capital stock (O’Rourke and Williamson 1999, Chapter 11; Obstfeld and Taylor 2004; Taylor 1992). These developments were inter-related: capital and labour flowed from Europe, chasing resources elsewhere in the world – primarily, but by no means exclusively, land on the frontiers of the New World. Capital financed massive investments in transportation and other infrastructure, making it possible to bring Source: Findlay and O’Rourke (2007, p. 506), updated using data from WTO these resources into productive use, and hence Overall, what is striking is that history provides little generating flows of income which borrowers could use evidence that extreme developments towards cross- to repay their debts. Most of the capital flows involved border banking such as what the western world bond finance. witnessed between the mid-1990s and the outbreak of the Great Financial Crisis in 2007 are essential Globalization and Finance Project, University of Oxford 19 JUNE 2012 / 3 to support inclusive and sustainable growth. This certainly does not mean that a fragmentation of the global banking system along national frontiers would be a desirable development. It does mean, however, that it is deeply flawed to argue that in an effort to support growth and employment, the aim of the on- going regulatory reform efforts should